Lessons From a “Smart” Vending Machine: When is it OK to Raise Prices?

Mihir Kittur, Co-founder and Chief Innovation Officer, Ugam,

Price Intelligence, pricing intelligence, Dynamic pricingIt’s summer time and many of us are heading to the beach. After a few hours of lounging in the sun, how badly do you usually want an ice cold drink? How much more are you willing to pay for that drink over the regular supermarket price?

In 1999, the Coca-Cola Company tested vending machines that would automatically charge higher prices for cold beverages when the temperature got hotter. According to The New York Times, the variable pricing vending machines were outfitted with a heat-sensor and a computer chip.

Even though consumers often pay more for cold soft drinks at the beach, there was a backlash against a “smart” vending machine doing the same thing. “What’s next?” sniffed one beverage industry executive, “A machine that X-rays people’s pockets to find out how much change they have and raises prices accordingly?”

Archrival PepsiCo also ripped into the plan, eager to portray their brand as fighting to keep prices low. “We believe that machines that raise prices in hot weather exploit consumers who live in warm climates,” a spokesperson said. “At Pepsi, we are focused on innovations that make it easier for consumers to buy a soft drink, not harder.”

Coca-Cola abandoned the experiment because many customers felt they were being taken advantage of.

Unlike in the Coke story, retailers do not have to come across as the bad guy when raising (or simply not lowering) prices. The key is knowing when customers won’t notice or care. For example, when people pay twice as much for soda at the movies, there are no protests. Customers already have the expectation that concession prices will be higher in the theater, where a popcorn and drink can easily double the cost of a ticket.

The trick for retailers is meeting customer expectations, figuring out what they believe is a reasonable price to pay.

Dynamic Pricing – raising, lowering or keeping prices the same based on changing conditions – is not the same thing as price matching.

So how can retailers raise prices and still be perceived as offering value?

A common promotional tactic during back-to-school season or Thanksgiving week is lowering prices on Key Value Items (KVIs) – usually about 10% of the items in the store – while modestly increasing prices on everything else. Shoppers are attracted by the deals on the hottest products and inevitably buy other things on impulse while they’re in the store. The lower margins on those KVIs are more than balanced out by higher prices on the remaining 80-90% of products in the store.

Psychologically, a customer feels good about getting their special item at a bargain price and will likely not notice the slightly higher prices on everything else in her cart.

Here are four unconventional ways you can use Dynamic Pricing to increase your profit margins by up to 3%:

  1. Know the Sources of Your Website Traffic – Did a customer arrive on your site after a random search or did she or he return as a repeat customer? Traffic from comparison-shopping engines is believed to be far more price-sensitive – that is, these shoppers will quickly search elsewhere if they don’t immediately like what they see. Customers who click a link on a blog or act on a referral or product recommendation are more motivated to shop with you because of reputation, selection, service or other reasons.
  2. React Only to Competitors Who Impact Your Sales – Somewhere in Kansas, someone is selling the same exact item out of their garage, but has only three of them. Don’t worry about that guy. Only monitor and respond to the prices of retailers who pose a statistically significant competitive threat. A large company that you perceive to be a competitor may not be in a certain product category. Analyzing traffic on competitor product pages can narrow down who you really need to keep on your radar.
  3. Learn Which Products You’re Really Competing Against – When you are comparing prices, consider looking beyond exact brand or product matches. Think about functionality. For example, a beach enthusiast looking for flip-flops may also be considering rugged sandals or water socks. It’s more effective to look at best-selling items in a category as a reference.
  4. Understand the Purchase Path for Your Products – Consumers are leaving behind plenty of clues why they visit a product page and what seals the deal for them. You may choose to reward your most loyal and profitable customers with exclusive offers only for them – increasing the likelihood they’ll be back.
Dynamic Pricing is implemented by using an analytics-driven Rules Engine. Analysts or category managers can create a set of conditional rules that dictate how your prices will change in response to competitor’s price changes or other market conditions.

Thirsty for more? Download a complimentary copy of our new eBook, “Pricing Intelligence 2.0: The Essential Guide to Price Intelligence and Dynamic Pricing,” for retailers and brands.

Download your copy today!

The Author:
Mihir Kittur is a Co-founder and Chief Innovation Officer at Ugam. He oversees sales, marketing and innovation and works with leading retailers and brands with insights and analytics solutions around their category decisions to improve business performance.


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